Competitive Intelligence
Competitive Intelligence and Espionage
Team B
University of Phoenix
Business Law 415
Brien Walton
April 10, 2006
1
Competitive Intelligence
Table of Contents
Table of Contents
2
Thesis Statement
4
Introduction
4
Agency Law
4
Duties of Principals to Agents
5
Contractual Liability
5
Partial Disclosed, Disclosed and Undisclosed Principal
6
Liability for Torts
6
Liability for Crimes
6
Liability for Torts/Crimes of Officers and Directors
7
Business Entities
7
Sole Proprietorship
7
Partnerships
7
Corporations
8
Limited Liability Companies
8
Limited Liability Partnerships
9
Franchising
9
E-Business and the Global Legal Environment
Entrepreneurs
9
9
Partnerships
10
Corporations
10
Limited Liability Companies and Partnerships
10
2
Competitive Intelligence
Franchising
Competitive Intelligence and Espionage
11
11
Trade Secrets
11
Theft
12
Fraud
12
Online Sabotage
12
Telephone and Email
13
Inside Information
13
Camera Phones
13
Wiretaps
14
Surveillance
14
Impacts
15
Positive Aspects
15
Negative Ramifications
15
Protection and Legal Retribution
15
Legislation
15
Lawsuits
16
Conclusion
16
References
17
3
Competitive Intelligence
4
Competitive Intelligence and Espionage
Thesis Statement
To explain competitive intelligence and espionage in business including how it relates to the
application of agency law, whether it distinguishes between the various business entities, and
how it impacts e-business in the global legal environment.
Introduction
Competitive intelligence (CI) and corporate espionage are methods used by businesses to
sharpen the competitive edge. CI is the legal gathering of information about competitors using
public sources like annual reports, company websites, and securities filings (Samborn, 2004).
Companies use this data for strategic planning, product development, and new market
development. At the other extreme, corporate espionage is the illegal gathering of private data or
trade secrets using computer fraud, wire or phone tapping, or breach of confidential relationships
(Marrs, 2000). This paper will examine CI and corporate espionage in business, their effects on
agency law and different types of business entities, the impact on e-business in the global legal
realm, and will present legal remedies and legislation created to protect intellectual property.
Agency Law
Agency law is an area of law dealing with a contractual set of relationships in which an
agent is authorized to act on behalf of another (principal). Almost every one has been involved in
an agency type contract at one time or another, whether written or oral. Some examples of
agency contracts would be lawyer-client, employer-employee, or even friend-friend, if one friend
asks another to perform an act in his or her behalf. Barnes, Dworkin, and Richards state “Agency
law especially focuses on the relations between principals and agents and the third persons with
whom agents deal in making contracts on behalf of principals.” (2003).
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Duties of principals to agents
The four common-law duties that a principal owes an agent are:

Perform the agency contraction

Compensate the agent

Reimburse the agent for expenses

Indemnify the agent for loss suffered resulting from the agency
The principal has the duty to abide by the terms of the agency contract. If the principal
wrongfully breaks the contract, the agency is terminated, although the principal will still be liable
for damages to the agent. If an agent is not performing according to the agreement or is guilty of
wrongdoing, the principal may justifiably terminate the agency with no liability on the
principal’s part. When the agent has performed his or her part of the agreement, the principal has
the duty to pay the agreed amount of money.
Contractual liability
The concept of contractual liability is used in business to obtain a contract with a
company when both parties foresee large earnings. This concept also allows one company to
enter into a contract with little or no liability.
“It is common in construction and other agreements (written or oral) for one party to
"assume" the liability of another. This is sometimes referred to as a "hold harmless"
agreement. The extent to which one holds another harmless varies from contract to
contract, job to job, etc. To assume the liability of another, regardless of extent, is a
voluntary undertaking which increases exposure to loss. A standard Commercial General
Liability policy does cover this additional exposure subject to certain exclusions.”
(Lewis-Chester, 2000)
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Partial disclosed, disclosed and undisclosed principal
Within agency law, a principal authorizes an agent to enter into a contractual agreement
with third parties. The authorization of the agent makes him or her liable under the contract.
“The imposition of such liability depends upon whether the agent is classified as fully disclosed,
partially disclosed or undisclosed” (Cheeseman, 2004).
The variance between fully, partially, and undisclosed principal, is slight; each of
extreme importance. The identity of the principal may or may not have been released to the third
party. Therefore, based on the type of agency, the liability of the contract will change. “The
liability in a fully disclosed agency would fall upon the principal; however, in a partially
disclosed or undisclosed agency both the principal and the agent are liable.” (2004).
Liability for torts
According to Cheeseman, a tort is a wrong (2004). There are three categories: (1)
intentional torts, (2) unintentional torts (negligence), and strict liability. A liability is a legal
responsibility, duty, or obligation (2004). The responsibility, duty, or obligation may be
expressed or implied from a contract and can be enforced by law.
Liability for crimes
In order for an organization to be held legally responsible for crimes, illegal activities occur
on the property resulting in criminal acts being committed which may have no actual intent.
These crimes are as broad as “obstructing a highway, operating a gambling house on corporate
premises, usury, air, and water pollution.” (Bailen, n.d.). In earlier times, corporate liability was
difficult to establish. However, approaches of this kind carry various well-known limitations.
Presently, statutes label a corporation's indiscretions. Crimes have an immense effect on
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shareholders and present a sinister view of the company's reputation. Corporations convicted of
crimes are responsible for compensation damages and/or imprisonment of employees.
Liability for torts/crimes of officers and directors
In agency law, the liability for torts rests squarely on the shoulders of the employer.
“Respondeat superior” is the Latin term for the legal doctrine of “let the master answer.” In the
event that officers of the company commit a crime while in the employ of the company, the
company holds the liability if the company authorized the officers to commit the deed of that
crime. Even though the company is usually liable, this does not mean that the employee is not
responsible for his or her own actions. Usually if a company is sued, the employee is also sued.
More often than not, the companies pay the damages because they can afford to do so more
readily than the employee.
Business Entities
Sole proprietorship
A sole proprietorship is a business operated by a person as his or her own personal
property and is considered an extension of the individual owner (Cheeseman, 2004). The
individual owner can assume a business name such as a “Doing Business As.” The sole
proprietor may also hire employees as personal employees of the individual. As the sole
proprietor, the individual assumes the majority of all liability.
Partnerships
Partnerships can be formed to allow a person to make gifts of partnership interests to family
members while maintaining control over the underlying assets. Partnerships do not pay taxes and
do not have to make special elections in order to be taxed individually on partnership profits.
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Partnership interests are usually subject to transfer restrictions that can justify even more
significant valuation discounts for gift-tax purposes (Rushforth, 1999).
Corporations
Corporations are frequently used to shelter personal assets from the liabilities of a
business. Gifting stock in a family corporation is a relatively simple way to make gifts. Gifts of
minority interests and non-voting stock are not only entitled to valuation discounts but they
entitle the recipient to retain control of the corporation and its assets. Corporations are separate
taxpayers ("C corporations") unless their shareholders elect to be taxed individually on their pro
rata share of corporate profits ("S corporations")(Rushforth, 1988-1999).
Limited liability companies
A business ownership that incorporates or combines features of a corporation and
partnership structures is known as a limited liability company. The advantages of a limited
liability company are liability protection, flexible profit distribution, no minutes, and flow
through taxation. Zahorsky comments:
Owners of a LLC have the liability protection of a corporation. A LLC exists as a
separate entity much like a corporation. Members cannot be held personally liable for
debts unless they have signed a personal guarantee. Limited liability companies can
select varying forms of distribution of profits. Unlike a common partnership where the
split is 50-50, LLC have much more flexibility. The LLC business structure requires no
corporate minutes or resolutions and is easier to operate. All your business losses, profits,
and expenses flow through the company to the individual members. You avoid the double
taxation of paying corporate tax and individual tax. Generally, this will be a tax
advantage, but circumstances can favor a corporate tax structure. (2006)
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Limited liability partnerships
A limited liability partnership (LLP) is a relatively new way to establish a business so
that the partners in the business can freely participate in the management of the business without
exposing themselves to personal liability. The partners’ liability is limited to the amount each has
invested in the business. The LLP is a separate legal entity and allows the partners the flexibility
to organize their management structure as a traditional partnership. LLP's are only available in
certain states and, in some states, are only available to attorneys and accountants.
Franchising
When franchising a business, businesses must abide by federal and state guidelines. “You
must provide prospective franchisees with a Uniform Franchise Offering Circular ("UFOC"), a
government mandated document that has 23 specific disclosure items” (Story, n.d.). An
operating manual is required to provide extensive training and guidelines toward achieving
success. Three years of financial statements are needed and these statements are usually audited.
Solicitation, sales, and support are needed; therefore, a strong infrastructure should be put in
place. Retaining a lawyer who specializes in franchising is strongly advised (Story, n.d.).
E-Business and the Global Legal Environment
Entrepreneurs
“The allure of owning your own business is undeniable: creating the joy of your dreams,
greater control of your time and potentially more money” (Bamber, 2006). The entrepreneur that
desires to start an e-business would have the same desires and goals except on a global scale. The
World Wide Web (www) for the novice entrepreneur makes them a target for a global onslaught
of online fraud and security risks. Therefore, due consideration is needed to protect the
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entrepreneurs’ intellectual properties. The legal protections of copyrights, trade, or service marks
can solidify the new ventures and protect the entrepreneur from common pitfalls.
Partnerships
E-business relies on partnerships and thrives on collaboration, use of common
technological platforms, and business processes. The need to collaborate and form new
partnerships to realize the benefits of e-business may be at odds with competitive organization
structures and mindsets (Mitchell, 1999). Technology is continuing to grow and e-business will
continue to play different roles in the e-business environment.
Corporations
E-business is emerging as a priority to many corporations which have established
departments to develop potential. The Cahners In-Stat Group reports that large corporations have
almost one million remote office locations globally (as cited in Many U.S. Corporations Going
Mobile, 2000). Websites provide access to customers in markets all over the world that were
once out of reach. To protect online information, strong encryption and security measures should
be in place.
Limited liability companies and partnerships
Limited liability companies and limited liability partnerships, like corporations,
participate in e-commerce on a global scale. Products and services are advertised on company
websites and e-mail is used to communicate with customers worldwide. For example, Laughing
Moon, LLC is a small toymaker in Ventura, California whose customers can browse products on
the company’s website. Although mainly selling to individuals who attend craft and art shows in
the U.S., Laughing Moon now has customers in Europe due to its web presence (Laughing
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Moon, LLC, n.d.). O’Melveny and Myers, LLP, a law firm founded in Los Angeles, now has
offices in Europe and Asia and a practice that spans the globe (O’Melveny & Myers, n.d.).
Franchising
“The four stages of e-business development have been defined as presence, interaction,
transaction, and transformation” (Grant, 2001). At times, companies are worried about the
opportunity and risk of e-business. Since e-business is constantly evolving, projects can be
implemented too soon, avenues may not be thoroughly explored, and options that are available
may be missed. An experienced leadership team is needed when an organization is attempting to
institute e-business. Management must work with the employees to build a strong vision towards
the future and execute by adapting quickly to and being risk takers in a constantly changing
environment (Richard, 2001).
Competitive Intelligence and Espionage
Trade secrets
A trade secret is any protected information within a company that is not commonly
known. Since this information provides an advantage over the competition, unauthorized use
could result in loss of profits to an organization. Trade secrets are not registered in the way that
patents are, so extreme care must be taken to ensure the confidentiality of this type of
information. By sharing trade secrets with competitors, employees or former employees of an
organization can disclose guarded information. Limiting the access of employees on a need to
know basis and requiring confidentiality and non-disclosure agreements can help protect a
company from unauthorized use of trade secrets.
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Theft
One of the most consequential disadvantages in business is “Economic and Industrial
Espionage.” (Naef, 2003). Spying on the competition has become a notorious issue in the
business market today. It appears that hackers are more of a financial threat than organizations
can control. Billions of dollars are lost over the theft of trade secrets from other institutions
(Naef, 2003). One example would be the case of Intel versus a previous employee who stole a
trade secret from the corporation as he left. “This act is covered under the Economic Espionage
Act of 1996.” (Naef, 2003). Fortunately, the former employee did not profit from this theft.
Fraud
Fraud is a deliberate misrepresentation that causes someone to suffer damages. Fraud is
very difficult to prove in a court of law. In order for fraud to be proven, several conditions must
be met. The most important is to prove deliberate misrepresentation. The second thing that must
be proven is the justifiable or actual reliance on the expertise of the accused. The hardest part of
winning a fraud case is proving that the person who suffered damage took appropriate measures
to investigate and discover the potential for fraud before he or she invested.
Online sabotage
The use of computers and the internet have increased the vulnerability of companies
through the threat of online sabotage. Attacks on the company’s information systems can come
from employees or from outside of the organization. A study conducted by the US Secret Service
found that 29% of attacks were from employees and 71% from outsiders (2002). Online sabotage
consists of stealing confidential information about the company, accessing private information
about customers and employees, deleting files, and planting viruses, worms, and bugs to destroy
databases and operating systems. Email systems are also subject to attack. McAfee, an anti-virus
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company, reported that in the first half of 2005, 16,000 computers were “infected with malicious
code” (as cited in Spring, 2005).
Telephone and email
“Hacking is considered one of the top three methods for obtaining trade secrets, and it is
only increasing in popularity” (Robinson, 2003). There are three types of hacking: physical,
remote, and system. Physical hacking occurs when an intruder enters the premises and attempts
to search for information; remote hacking is going through the internet or network; and system
hacking occurs when an authorized system user gains unauthorized administrative privileges.
Telephone eavesdropping is another form of corporate espionage. Digital recorders are available
that allow hackers to monitor and record fax transmissions. Hackers are also able to record key
tones that allow them to decrypt account numbers or passwords (Robinson, 2003).
Inside information
Investors rely on up-to-date information to make intelligent decisions. The valuable
information and its flow are often crucial to the future of many of these organizations. Inside
information is held secret and is necessary to the future success of the organization; therefore, the
exchange, traffic, and disclosure of such information must be guarded. An insider is an officer of
a corporation with equity securities registered under the 1934 Act (Cheeseman, 2004). The 1934
Act requires issuers of securities to register the securities under interstate commerce or the
American Stock Exchange (2004).
Camera phones
Austin (as cited in Guarding the Digital World) states:
“We live in the information age and information these days is the currency of
commerce.” “Stealing can be as exotic as employees using their camera phones to take
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pictures of confidential business documents. It can be a software developer putting a back
door into a software program that will allow him or her to sabotage the network. It can be
as simple as an employee picking up a confidential business plan and walking across the
street to the competitor. It really runs the gambit.”(2006).
Many companies have taken necessary steps to protect themselves to prevent “corporate
espionage and spying” (2006). Training employees on appropriate conduct, increasing and
improving security systems and checkpoints, and ratifying company policies seem to be the only
defense available.
Wiretaps
There are several wiretap devices available. “U.S. State Department estimates that there
are over 700,000 eavesdropping devices each year.” (The Red Balloon, 2005). This makes it
amazingly effortless for rival agencies to operate in an unethical manner by illegally wiretapping
the competition. “The Industrial Espionage Act has done little or if anything to deter the rapidly
growing rate domestic and foreign competitive intelligence in the U.S.” (The Red Balloon,
2005). Many resources are accessible for corporations and individuals to gain access to classified
information and to use this intelligence in a destructive manner.
Surveillance
Over the years, video surveillance has been used to deter individuals from causing
problems on public or private property. “Use of other new and innovative technologies; such as
computerized mapping for crime control and non-metallic weapons surveillance, show potential
for targeting public video surveillance activities” (Nieto, 1997). Video surveillance is beneficial
when attempting to incriminate individuals for wrongdoing on public or private property. If the
public is aware of personal or video surveillance, the mood is more mundane than when acts can
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be performed in private or secrecy. When the chances are greater that video surveillance is being
used, the percentages are definitely higher that safety is being addressed (Nieto, 1997).
Impacts
Positive aspects
The field of competitive intelligence is a necessary field of endeavor for large and
medium sized organizations. The field allows the organizations to have increased security
measures by knowing the trends that other organizations are using to obtain information in their
respective markets. As a result of information and research, organizations can obtain useful
information through legal channels that allows their organizations to remain competitive or to
have a competitive edge in their market. Organizations may also thwart the illegal acquisition of
information by other organizations attempting to obtain an edge in the market by acquiring
information through illegal practices.
Negative ramifications
“Ethical choices come routinely to the intelligence analyst, who must decide each day
what gets reported to policy makers” (Shane, 2006). Integrity, honesty, and accountability are
valued qualities among the people of the world. Unfortunately, the effect of illegal forms of
competitive intelligence and espionage leave these qualities entangled in the quagmire they
create: lawsuits, grand jury appearances, and massive fines.
Protection and Legal Retribution
Legislation
Domestically, most states have adopted the Uniform Trade Secrets Act which provides
civil remedies for trade secret piracy (Cheeseman, 2004). Competitive intelligence may violate
federal antitrust laws like the Federal Trade Commission Act that outlaws unfair competition
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(Nahrstadt, 2005). The Electronic Communications Privacy Act protects e-mail whether in
transit or stored on a server. The Economic Espionage Act makes it a federal felony for
individuals or businesses to steal trade secrets to give to foreign entities (Silva, 2000).
Internationally, trade secrets are protected under treaties and conventions: the United
Nations World Intellectual Property Organization (WIPO) and the World Trade Organization’s
(WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
(Cheeseman, 2004). The WTO may hear disputes against nations who fail to protect intellectual
property rights within their borders. A nation also has authority to prosecute businesses that
commit crimes within its borders or that violate its laws (Cheeseman, 2004).
Lawsuits
An example of a huge lawsuit is against Westjet airline, who shared critical information
on clients with Operations Research firms (Transparen, 2004). It can be assumed that this was
not a criminal act. The motive for this lawsuit was that two rivals used the same Operation
Research adviser which is a conflict of interest.
Conclusion
Agency law as well as competitive intelligence and sabotage impact every type of
business entity. Laws between principals, agents, and third parties must be respected to avoid
destructive legal issues and lawsuits. In the business world, extreme caution must be taken to
differentiate between legal competitive intelligence gathering and the illegal aspects of
espionage. As the world of e-business continues to expand, programs should be implemented
that will protect the company and guard against illegal online activities. While competitive
intelligence can help the company reach higher levels of performance and success, espionage and
sabotage may destroy it.
Competitive Intelligence
References
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